CFD is basically the kind of trade where you speculate the price movement of a number of financial markets like shares, indices, commodities, and currencies. If you are right, you profit from the trade and if you are wrong, you lose. It is a very popular kind of trade for many investors today due to its flexibility. This is because a trader can trade in the rising as well as on the falling markets. Just like in any other kind of trade, CFD has rules that traders must adhere to. Failure to follow through with the rules is the reason why many people make mistakes in CFD, which in turn makes it hard for them to enjoy success in their trading career. Here are 5 must know online CFD trading rules for every aspiring trader:
- Always use logic, not emotions
Emotions constantly get in the way of decision making for many traders. This is so especially if you focus so much on what you might gain through a certain trade. That is why you need a plan, and the discipline to follow your plan no matter how many times you lose. Trading emotionally may give you big winnings occasionally but the winnings are not consistent and you might be losing more on the other end.
- Do not dwell on a single trade
Betting all your money or most of your money in a single trade is a big risk, as you might end up losing it all at once. Traders need to know how to spread the risk, without betting on all the money they have in their account. This way, there is no single time they will be without money in their trading accounts.
- Timing is important in CFD
You should never enter a trade when it is too early even when you are sure about the long-term direction of the market. This is most cases leads to significant losses. You need to wait for a trigger; just a single confirmation to be sure about the direction you will trade in. Taking time to think things through may be all you need to enjoy a big win thereafter.
- Always diversify
A well-diversified portfolio will never fail you. In as much as you need not trade with all the money in your account, you need to try your chances in different companies and industries if possible. This way, if something were to go wrong in one direction, you will still have others to rely on. With the uncertainty of the market, you can be sure that some prices will be going up when others are declining.
- Use stop losses, but wisely
Stop losses will be very good in this kind of trading considering how risky CFD is. They will help you minimize your losses. However, you have to be careful with them because if they are too tight, you might end up losing even more. You need to use them wisely, allowing the market to go about its price increases and declines before settling for one direction. Take time to think of how much loss you can take so as to set stop losses at a considerable level.
It is very easy to make profits in CFD because every move the market makes in your favor gains you some profits. However, you need to abide by the rules because these are what will make you a smart trader. Always remember that there are losses too, and the market can be very unfair especially if you trading recklessly.